January 2004

FERC's 2004 Guidelines

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2004/01/23)
 

It really has been an extraordinary year for the power industry. They say if you do not learn from history, you are doomed to repeat it. So FERC has decided to issue new Guidelines, to respond to what we all have learned.

First, a special task force identified what  that was.

It has been a year of drawing a new profile around the negative space to be perceived where substance had been  forecast to exist:

• The lights went out in an extraordinary  blackout, highlighting the frailties of the grid.
   

• The Energy Act failed (for now) to pass,  highlighting the perceived ability of the U.S. to make do if  need be with the status quo and higher imports.
   

• The implosion of the merchant plant bubble  did not (yet) lead to multiple bankruptcies of foreclosures on  assets or the collapse of the refinancing debt ledge.
   

• The deregulation revolution did not crest  with the introduction of SMD and the shaping up of the  system through behavior codes. 
   

• The world did not turn sustainably greener  through carbon trading of the displacement of coal. Maybe  Putin owns shares . . .

Important tax incentives for receivables lapsed and the political drive to green flagged accordingly.

It has been a year when, moving with less fanfare, but with tangible solidity, the discernible profile of major  future trends took form.

• The financial attractiveness of rate based regulations relative to the merchant model, dependent on uncertain markets became apparent, particularly as fuel prices volatility became apparent.
   

• The overhang of gas priced capacity in many parts of the country assumed seemingly glacial form, with increasing doubt that economic thaw could bring its melt in tow.
   

• Great pools of equity were assembled which have yet to be expended on the bargain sales of yet to be uncovered distressed plants.
   

• Consolidation of the competitive positions of the largest utilities slowed, but the long term importance of balance sheet size (particularly once PUHCA repeal is completed) became increasingly clear.
   

• The considerable loosening of environmental standards for existing coal fired generation pointed toward a greater stability in the existing plant fleet, and a greater interest in the lower fluctuating fuel alternative.
   

• The Enron taint of fraud or financial weakness hovered over the first wave of power marketers lingered, while well capitalized financial institutions supplanted high flying trader developers.
   

• FERC promulgated more and more standards of good behavior and rotections against abuse of size and power, as the national work of locking barn doors past horse departure flooded over energy companies of all types.
   

• Those “to-be-mothballed” nukes showed new baseload kick as well.
  
  The Task Force concluded that it was hard to know what this all means.  Specifically, it remarked as follows:

“The paradox of energy industry forecasts, based on trends remarked, is that while the underlying realities change slowly, and it takes a long time physically to build assets, perceptions and related markets can change much more quickly.  Just when we have long forgotten the hulls of coal gasification plants and slurry pipelines and LNG terminals, the bidding for non-existent turbine capacity and hockey stick power price projects for CTs. Things have a way of changing, because hard as quantitative analysis is, it has a way of being swept aside by the sensitive response of markets and the confounding effect of derivatives.”

The New Guidelines

Which is why, as we greet 2004, we should be grateful that FERC has published its new Energy Policy Guidelines, striking directly at the affiliate issues so long dogging deregulation. Henceforth, for a rate to be market based,

• It must be fully disclosed and determined to be prudent by the appropriate TBD] regulatory body before its costs can be passed through.
   

• It is only available to regulated utilities whose regulated vs. deregulated VAR meets certain ratio tests (definition to be published for comment by FERC next year).
   

• To provide marginal price parity among generators, all prices will be indexed to a basket of natural gas future prices, predetermined quarterly (the process to be known as “ratings sweeps.”)
   

• If a facility receives “green tags” associated with solar collectors, it may receive PURPA rates, but they must be market capped. Otherwise, the question is left for rehearing.

So at this special time of year: we thank Congress for leaving FERC to plan, and FERC for the guidance it has now  provided us.

ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years.  In particular, he has analyzed and executed a wide variety and substantial value of project financings.  He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration.  He is a graduate of Brown University, Yale Law School and Harvard Business School.